If the goal of creating an app for mobile devices is to make a profit through downloads or advertising revenue, then there are many important decisions in the development process that should be considered early on to come up with a sensible pricing model. Why? Because knowing the pricing model might very well change how the app functions, is structured or designed. So having a plan before development and testing is key.

Should the app cost money to purchase? Should it be given away for free and paid for from ad revenue?

Pros and Cons
Earning money from mobile apps whether paid or free can be difficult, but working backwards to best ensure the financial success by coming up with the right model can help your app to be successful from the start, and provide the capital for future improvement or new projects altogether.

Free apps are appealing to users (and developers) because they are more likely to be downloaded. Paid apps have their advantages through more immediate and more predictable revenue than through ads. No developer who has created an app wants users to be dissuaded from downloading the app because of the price, but how can you confidently come up with a plan to price and add your app to app stores and know you’ve made the right decision for your situation?

Market Matters: iOS versus Android
For starters there’s a huge cultural difference between iPhone and Android users. iPhone users come preconditioned paying for content dating back to the days when iPods roamed the earth. For that matter, iPad users are even more tolerant, with 80% of all iPad apps listed as paid apps.

Meanwhile, the Android market is less mature and more skeptical of paying for apps. Pingdom.com created a great graphic showing the difference between the iOS and Android marketplaces, and the difference between which two markets is staggering.

As you can see, Apple’s iOS App Store has just under 70% of all apps listed as paid apps while the Android market only has 36% of its apps in the paid category — almost the numerical reverse. Pingdom has a few theories on why there’s such a huge disparity, but the bottom line is that Android is less tolerant to paying for apps so knowing that going into a development cycle could change development priorities or plans.

Know Thy App: Every App Vibrates to that Iron String
If you’ve never developed an app in the exact same space before, it might be hard to know definitively what your market is. Is your market a niche or a broad audience? Games like Angry Birds or Draw Something have a mass appeal, while an app that charts the details of the Battle of Gettysburg during the Civil War likely has a much smaller audience. Knowing a user’s behavior with the app will help you to plan for your monetization model. If it’s not expected to have a wide user population, how does that change the revenue model? Is the development cost going to be less than the potential payoff in paid downloads or ad revenues?

If the app is something that’s wildly addictive or something that has sticking power (games, entertainment news or sports news would be examples of categories that have more proven stickiness), then even a loyal and small user base might be able to float the right ad revenue numbers.

Do Your Market Research
BASF’s age old tagline is “we don’t make the things you buy, we make the things you buy better” and they might be onto something. No one will argue that disruptive technology is what propels the tech economy forward, but while new and original ideas in the app-space can be good things, they can’t be counted on for being wildly successful. Here’s what Chad Mureta, successful appreneur wrote on Tim Ferriss’s blog a few weeks back:

I can’t stress the importance of emulating existing apps enough. It’s easy for people to fall in love with their own idea, even if the market doesn’t show an appetite for it. But this is one of the costliest errors you can make. Unfortunately, developers make this mistake all the time. They focus on generating original ideas and spend a lot of time and effort creating those apps.

Before getting too deep into the development of the app for the purpose of profit, be sure to understand what your market is and more importantly download other apps that are in the same space you might consider competitive. Read the reviews, make notes of the apps and try to find a way to bridge gaps in that space with a better product than what currently exists.

It’s Money That Matters
The more niche the app, the more likely charging for an such an app should be.

Why?

Because it’s purely about the numbers.

Until an app’s usage data proves otherwise, app rarely have supernatural stickiness, according to Pinch Media, most apps get only 12 total uses. Pinch Media has created apps with millions of downloads, and a while back crunched the data to come up with best practices for creating paid versus free apps.

– The average free app gets only 12 uses by its users
– Apps that are free are 6.6 more likely to get downloaded than a paid app.
– A paid $0.99 app at the lowest price will net its creator $0.70 per user in the iPhone App Store
– Free apps, using the 6.6X modifier still only equals 80 total ad impressions
– Can the average app make $0.70 off around 80 impressions?
– $0.70 in 80 sessions translates to an $8.75 CPM rate

From talking to advertisers within the last two weeks, most current ad markets bear anywhere between $0.50 — $5.00 and guess which end you’re most likely to get at the start? It’s fair to say that the numbers are not even close to the $8.75 mark that would be the break-even. In summation, there’s very little chance that you’d make as much, even with 6.6X less users than had you charged $0.99 for the same app. Now imagine you create a killer app in your area that can command a higher price like $1.99 or $2.99? What would the CPM rates need to be in those cases?

Of course, the downside here is that paid apps will more likely create negative feedback from the user-base if you don’t deliver with a clean, intuitive, and well-coded app and a group of negative comments on the app can kill it’s potential.

There Are Always Exceptions to the Rules
Are there exceptions to the rules of making apps for monetary reasons? The growing trend of in-app purchases cannot be discounted, and while this post didn’t dig into it, it’s a very promising model. If the app created is sufficiently sticky to garner thousands of views from the user-base and the base gets big enough, then there’s the potential to make lots more money from ads than from just a single download fee. To make the $8.75 CPM rate, the typical app would have to carpet-bomb users with obtrusive ads to beat the money it would make in the same number of total impressions from a paid version.

In Conclusion
This post was meant to discuss some of the most common app monetization factors, but it bears saying that there are many more models that are proving profitable and that should be taken into consideration. In-app purchases is one of the biggest growing areas in apps, free apps promoting mobile based transactions, free apps meant to build brand awareness, apps created for generating sales leads … etc. There’s a million ways to go based on your specific situation, but hopefully this was at least some food for thought.

If anything the hope here is that this post brought to mind some alternative monetization models. We’d love to hear your experiences, concerns and questions in this process. Please share your thoughts in the comments and as always, follow us on Twitter @Shockoe or join our Facebook Page for more app-related insights!